"The picture is still one of modified optimism," insists Zainal Aznam Yusof, deputy director-general for economics at Malaysia's Institute of Strategic and International Studies. Zainal is on the National Economic Action Council, a group of ministers, bureaucrats and academics convened by the Prime Minister to come up with emergency measures to save Malaysia's economy. The council had been secretly drawing up plans for currency controls since January, according to Zainal, who says the measures should be seen as "a temporary firewall, part of the recovery plan, not something separate and not a substitute for actions that must be taken." He concedes, however, there is still some debate about "how long is temporary."

The question at the core of Malaysia's economic dilemma is whether to bail out the country's struggling conglomerates. Mahathir maintains that many of the biggest, most heavily indebted firms are fundamentally sound but have fallen victim to attacks on the currency from outside "speculators." Some economists, however, argue that companies closely connected to Mahathir have long received preferential treatment and should be allowed to fail. "Indiscriminate assistance will not be entertained," says Special Functions Minister Daim Zainuddin, whom Mahathir tapped to supervise the rescue plan. Daim also promises that Malaysia will continue to revamp the financial system.

But many outsiders remain puzzled by the currency controls and skeptical that they will be accompanied by needed reforms. Paul Krugman, the M.I.T. economist whose FORTUNE article advocating currency controls started the debate, wrote an open letter to Mahathir Sept. 1 pointing out that imposing such restrictions "is a risky step with no guarantees of success." He identified four principles to follow: the controls should disrupt ordinary business only minimally; they should be in place for a stated period of three years or less; they should be based on a highly competitive real exchange rate; they should not be viewed as an alternative to reform but as a means of giving a country breathing space to undertake what's needed to clean up the financial system.

Four weeks into the new regime, Mahathir is not doing well by those principles. Importers and exporters desperately seeking guidance from the central bank on how new currency regulations affect their business are generally met with a slew of contradictory directives. Mahathir has said he sees no reason why currency controls shouldn't be permanent, contradicting some officials who say they won't be around for long. Mahathir has also said he might devalue the ringgit from its current rate of 3.8 to the dollar if necessary to maintain competitiveness in export markets. Moreover, there are signs--like last week's loosening of credit controls for banks--that the government is not serious about reforming the banking system and cleaning up the bad loan problem.

At best, say many economists, the controversial controls have given Malaysia temporary relief. "It has bought them six months to a year at most," says Sani Hamid, emerging markets analyst at Standard & Poor's MMS in Singapore. "What we are afraid of is that you will see economic growth at the beginning, but behind those numbers will be unproductive investments and an exact replica of the bubble economy that caused the crisis in the first place." In that case, much of what Mahathir has worked for could be frittered away.

With reporting by John Colmey/Kuala Lumpur

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